Transportation Insurance on Contract Liability and Brokers Liability
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INSIGHTS March 2018 Transportation Insurance on Contract Liability and Brokers Liability The good news is that because the semi has advanced autopilot there is a 99.9% chance that it is not going to hit us. However, unless we acknowledge and grapple with the changes that are taking place, the transportation insurance industry will miss the opportunity to respond to the evolving needs of both existing and new clients that the semi represents. Looking at the insurance industry as a whole, the financial fundamentals remain weak, with an over-supply of capacity that is being poorly deployed and not generating adequate returns to address the changing risk patterns. Rather than responding to changes in risk by addressing the underlying rating structure, insurers have been moving away from challenging exposures. Meanwhile, emerging technology and the shifting risk profiles that This paper addresses current insurance market challenges autonomous vehicles bring create related to existing and emerging risks in the transportation additional underwriting uncertainty with the backdrop of the reptile industry, including contractual liability, brokers’ liability and the plaintiff philosophy. impact of emerging technology such as artificial intelligence, blockchain and smart contracts. In addition to weak financials, the insurance industry’s product To say that the insurance industry, and in particular the transportation insurance industry, delivery process is highly inefficient, is at a crossroads would be an understatement. The truth of the matter is that the documentation issuance is antiquated transportation insurance industry is at the edge of a cliff and an autonomous electric and ineffective, and our value semi-trailer truck, loaded with 80,000 lbs. of cargo, is driving straight at us, accelerating proposition is not well understood by to 60 mph in less than 20 seconds. our clients. The barriers to entry into 1 INSIGHTS March 2018 our industry have been created through CONTRACTUAL LIABILITY outdated legislation, originally intended to protect the consumer, but currently Liability for the carriage of cargo is governed by the bill of lading. The bill of lading ensures only serving to make it more challenging there is clarity as to liability for loss or damage to cargo, and generally allows the carrier to for others in the financial services limit their liability for certain types of perils and to certain maximum dollar amounts. The industry or in the technology space to concept of limitation of liability of the carrier is one of the foundations of traditional cargo disrupt the way insurance business is and stems back to when the movement of cargo was considered to be an “adventure” currently done. Already penetrating the as opposed to an expectation. Over the years, aspects of carriers’ limitation of liability, personal lines space, insurance direct including the concept of General Average, have been challenged. Shippers are no longer writers and the banks have found a aligned with seeing the carrier’s transportation of their cargo as an “adventure” and, significant opportunity to improve upon as such, are not as willing to accept and, in many cases, even bother to understand the traditional delivery model and limitations of liability. capture a growing share of the market, and there is very little to suggest that This is being addressed through a dramatic increase in shipper designed contracts this will not migrate into the governing the movement of cargo. Although shipper contracts started out as something commercial space as well. that were primarily coming from the large box store retailers, it is now fairly common even among smaller shippers. Looking specifically at the transportation space, three important areas of focus that There are a variety of challenges with these custom shipper/carrier or shipper/broker will impact transportation clients over the contracts. Outside of just the basic construction of these contracts, which are often based next five years are: on supply contracts rather than shipping agreements, from an insurance perspective there are a number of issues of which carriers and brokers need to be aware – and that 1. Contractual liability would be beneficial for the lawyers assisting shippers with the construction of these How shippers’ attitudes towards agreements to consider. carriers’ liability for the transportation of cargo is changing. First, open-ended liability provisions are difficult to insure. While underwriters are becoming more accustomed to seeing challenging shipper/carrier or shipper/broker 2. Brokers’ liability contracts, the most difficult issue to address in an open ended contract is the financial The impact that the growth of impact of the contract on the carrier or broker. It should be remembered that a cargo asset-light and non-asset logistics liability policy has its foundation in standard limitation of liability, without an operations is having on automobile understanding of the potential financial impact of the contract, pricing insurance liability cases, along with how the coverage for an open-ended contract is almost impossible. insurance industry is responding to this. With this in mind, carriers and brokers need to focus on the following clauses when considering whether a contract will be accepted by their cargo liability underwriters: 3. Changing technology The introduction of new a. Cargo Loss or Damage technologies to both the The expectation that the carrier be liable for “all risks” of loss or damage is actually insurance and the transportation fairly manageable and even establishing that the carrier is liable for the full value of the industry will have a significant cargo (be it wholesale, retail, replacement or however they want it structured) is also impact on the fundamentals of manageable. However, the expectation that the carrier has to be liable for damage the insurance industry. to cargo without the value of the cargo being declared in advance of the shipment is unreasonable. The ideal of course is to have the shipper declare values on the bill of lading, subject to an agreed maximum value, as this will allow the carrier to establish an insurance solution for the transfer of risk that is priced directly against the value of the goods. If the shipper, at a minimum, is able to provide an average value and a maximum value it will allow the carrier to present a risk profile to underwriters so that a pricing model can be developed. 2 INSIGHTS March 2018 b. Liability for Consequential Loss clearly excluded from a standard are being rapidly eroded, and the While the concept of consequential bill of lading. Underwriters will plaintiff’s lawyers are looking to draw loss, or business interruption, is well still resist providing coverage for in as many deep pockets as possible. understood by cargo underwriters, liquidated damages and penalties This generally will include the broker having a shipper hold a carrier liable related to performance but there is a and the shipper. for an undefined and/or unlimited willingness to give consideration to consequential loss exposure is coverage if the exposure is quantified For the shipper to insulate unrealistic from an insurance and limited. However, as with themselves from the potential perspective. The classic example of consequential loss, an undefined liability exposure they have to what is “unreasonable” consequential loss or unlimited penalty provision, or a otherwise a third party carrier related liability comes from the 1980’s Just-in- penalty provision that is not aligned accident, these indemnity provisions time manufacturing revolution, where to the value of the goods themselves, place a clear expectation on the carriers supplying the automotive is not easily insured. broker to respond in defense of the industry were allegedly to be held shipper in the event the shipper is liable for $1 million per minute of e. Indemnity Provisions drawn into an action arising out of the plant shutdown caused by a late There have been plenty of articles broker’s selection of the underlying delivery, which is a contractual liability on the legality and applicability of carrier. This is actually not an that few carriers at the time would indemnity provisions in transportation unreasonable expectation, although have actually been able to insure. agreements, in particular we at some point it also needs to be Today, an undefined or unreasonable reference an article written several recognized that there is the potential expectation around liability for years ago by Rui Fernandes to help that the action being brought is also consequential loss, without the define what is and is not reasonable/ going to erode the limits purchased establishment of a limitation of legal under an indemnity provision. by the broker. As with the other liability, combined with the removal of While past indemnity provisions may clauses, having a completely open the force majeure provision, is almost have been deemed unreasonable, ended indemnity provision is difficult impossible to quantify and, as such, the need for indemnity provisions in to insure. If the shipper wants better very challenging to insure. the transportation space may actually protection against being drawn into be increasing, particularly as more an action being brought against c. Force Majeure provisions brokers base their network around the carrier, they should either set The removal of the Force Majeure smaller fleets of Contract Carriers a higher than standard minimum provision which would allow rather than working with larger expectation of carrier automobile avoidance of liability under contract in national carriers. As the automobile liability insurance (which will reduce extreme situations creates a challenge liability insurance market tightens, the number and cost effectiveness for underwriters, who cannot accept both in the working and buffer layers, of the carriers available to a broker) liability for every type of loss. The smaller carriers may not be able to or contract directly with a carrier Force Majeure provision should cost effectively arrange the higher who has higher automobile liability be maintained to allow at least an insurance limits they might have done limits.